Tesla, Inc. was originally founded as Tesla Motors. It is named after the great inventor named Nikola Tesla.
Tesla – the company – was not actually originally founded by Elon Musk, who is the face of the company. Musk was an early investor. He invested more than $30 million and became chairman of the company in 2004. It has been a good investment so far, especially on paper.
The price of Tesla’s stock recently surged above $1,000 per share. Given that there are about one billion shares, this means the company is now valued at over one trillion dollars as of this writing.
Is Tesla really worth one trillion dollars as a company? According to the market, it is. The only thing we have to go by is the last traded price of the stock.
Elon Musk’s net worth goes up or down on most days more than most people will ever make in a lifetime. If Musk’s net worth goes up or down “only” a billion dollars in a day, that would be a calm day.
Musk is now worth in the neighborhood of a quarter of a trillion dollars. But it doesn’t mean he has $250 billion available for spending. It is mostly tied up in the stock. If Musk wanted to realize his gains, the stock price would drop when he started selling heavily.
If you are a more average investor, it is not a problem to realize your gains by selling. If you took a chance and bought 1,000 shares of Tesla several years ago, your shares would now be worth over a million dollars. You could easily realize your gains by selling 1,000 shares, and it wouldn’t move the stock price more than a couple of cents.
So for people who invested (speculated) in Tesla stock, those gains are very real if you decide to sell.
Actual Valuation
The market says that Tesla is worth one trillion dollars. That is according to the buyers and sellers of the stock. But it doesn’t mean that it is a rational valuation. It doesn’t mean that the fundamentals of the company support this valuation.
The latest news that drove the stock higher was a report that Hertz is going to purchase 100,000 vehicles from Tesla for its fleet. Even if this comes true, how much is this really worth to the company.
Let’s be generous and say that Tesla has a really good profit margin and is able to profit $10,000 per vehicle sold. This would mean $1 billion in profit from the Hertz deal. That represents a profit of 0.1% of the company valuation.
Perhaps one could argue that the Hertz deal opens up the possibility of other similar deals in the future with other rental car companies. But even if Tesla got four more deals like this one, it is a tiny fraction of the company valuation.
Tesla is now the fifth or sixth largest company in the U.S. according to its approximate one trillion dollar valuation. The most valuable companies ahead of Tesla are Apple, Microsoft, Alphabet (Google), and Amazon. Facebook is around the same.
Most people I know use these five other companies. Facebook and Google have a ton of advertising revenue. Most people in the first world use Amazon to make purchases. Most people own a product that generates revenue for Apple or Microsoft or both.
I only know a few people who own Tesla vehicles. Tesla has a loyal fan base, and they are mostly people with money because the cars are so expensive. They don’t make any sense from a financial standpoint, but they are fun to drive.
Toyota is the second most valuable automaker, and I see a lot more Toyotas on the road than Teslas. The Teslas are more noticeable, but that in itself is a sign that there aren’t that many of them out on the road. Toyota, according to the market, is worth only about one-quarter of Tesla.
Sometimes you just need to use your own eyes to make a judgment. If you see a hundred cars on the road and just one of them is a Tesla, how is this company so much more valuable than all of the other automakers?
There is one final and important thought on Tesla stock to consider. According to the company’s website: “Tesla has never declared dividends on our common stock. We intend on retaining all future earnings to finance future growth and therefore, do not anticipate paying any cash dividends in the foreseeable future.”
The whole point of owning a stock is to get dividends. Sure, an investor/ speculator is just trying to make money, and you can make money by buying shares and selling them at a higher price. But if a company never pays a dividend, is it really worth anything at all?
When you buy shares of a company, you are buying a piece of that company so that you can share in the income that is generated. There is certainly a possibility that Tesla could declare dividends in the future, but that is not “in the foreseeable future” according to the company now.
Tesla may be valued at over a trillion dollars by investors and speculators, but it doesn’t mean it makes sense. Tesla is the face of the stock market bubble.